Vertical Integration to Kill Margin Stacking
Bring the differentiating 90% in-house to eliminate compounding subcontractor margins.
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 80%
SpaceX discovered that traditional aerospace was built on layer after layer of subcontractors, each taking their own profit margin on top of the last, producing what one industry voice called 'exponential G&A.' Instead of following the Detroit-style model of outsourcing everything but the engine, SpaceX chose to manufacture roughly 90%+ of each rocket itself, using off-the-shelf consumer-grade electronics where possible and only buying true raw commodities (metals, wiring) from thousands of low-level suppliers. This let them cut component costs by orders of magnitude, control quality and timelines, and iterate rapidly on every mission rather than depend on a slow, fragmented supply chain.
Origin
Extracted from Acquired
Core principles
- 01Every layer of subcontracting adds its own margin, compounding total cost exponentially.
- 02Vertical integration lets one company control cost, speed, and quality simultaneously.
- 03Only outsource true commodities; build anything differentiating in-house.
How to run it
- 1
Map the full supply chain
Trace every layer between raw material and finished product to see how many subcontractors take a cut.
- 2
Expose the margin stacking
Compare the raw material/commodity cost to the final purchase price; a huge gap signals exponential G&A across layers.
- 3
Identify what's truly differentiating
Determine which component (like an engine) is the core value driver and bring that in-house first.
Pro tip Hire or partner with the best specialist in that niche before building the rest of the org around them.
- 4
Substitute commodity parts
Replace expensive proprietary components with consumer-grade, off-the-shelf electronics and materials wherever reliability allows.
- 5
Keep only a lean raw-material supplier network
Retain suppliers only for low-level raw materials, not fully assembled subsystems.
Watch out Vertical integration requires large upfront capital and in-house expertise across many disciplines simultaneously.
- 6
Interrogate every high quote
Whenever a contractor's price seems inflated, ask why, and calculate whether in-house production would be cheaper.
In the wild
Rather than buying an engine from a legacy supplier, SpaceX hired rocket engineer Tom Mueller and built the Merlin engine internally from the start, giving them full control of cost and iteration speed.
→ SpaceX ended up manufacturing the overwhelming majority of the rocket itself, cutting component costs far below industry quotes.
A SpaceX engineer calculated that aerospace-grade aluminum, titanium, copper, and carbon fiber on the open commodities market cost roughly 2% of what a finished rocket sold for, revealing how much margin was being stacked by subcontractors.
→ This insight reinforced the decision to vertically integrate rather than rely on the existing contractor ecosystem.
Common mistakes
Assuming outsourcing is always cheaper
Horizontal outsourcing only becomes efficient at high production volumes; in low-volume industries it multiplies margin at every layer.
Not questioning contractor pricing
Accepting quotes at face value lets embedded cost-plus incentives go unchecked.
Is it for you?
Best for
Founders entering low-volume, capital-intensive industries dominated by legacy subcontractor networks with cost-plus incentives.
Not ideal for
High-volume commodity manufacturing where mature horizontal supply chains already offer competitive pricing and speed.
From the transcript
“We're gonna vertically integrate, we're gonna make ninety percent plus of this rocket in our own factories.”
“raw material rolls in one side of the factory and rockets roll out the other side”
“it's exponential GNA that you get when you have multiple layers of integration”
From the episode
SpaceX